This is platform for me to share my thoughts on Indin family businesses. Interest in the what and how of creating family governance mechanisms is rapidly growing in India and we need more avenues to share our ideas and experiences and I hope this will be one such!

Sunday, October 12, 2008

The fall of Lehman Brothers from the pinnacle also reflects the extent to which the organization has lost its character after the departure of Robert Lehman in 1969, the last member of the family to hold the top post. He served as the Chairman for 44 years until his death in 1969. Since then the organization has ceased to be a family business though the name was retained. (please see the following links for more relevant information: www.library.hbs.edu/hc/lehman; http://en.wikipedia.org/wiki/Lehman_Brothers ).

A close look at the history of the company would reveal that it started losing the trust element, that is the core of banking. One of the core values of such an organization is stewardship, which means that the individuals involved, particularly the leadership, feel themselves as stewards, who are there to offer selfless service. The core value of a family is also the same. Families that last generations honestly believe that they are the trustees of their respective family’s wealth and play only a custodianship role. They own nothing but have a responsibility to preserve the wealth and grow it to transfer to the subsequent generation, but not to destroy it in anyway.

With the passing over of the management of Lehman Brothers into leaders who, unfortunately, did not share the same core values of trusteeship, the organization was inviting trouble. Incidentally, the Wikipedia link (above) gives a lot of information on recent developments. One quote that reflects the lack of trusteeship value from it is reproduced here:

On October 6, 2008, CEO Richard Fuld testified before Congress. Rep. Waxman pointed out that Fuld had made nearly $500M since 2000, a salary incomprehensible to the average taxpayer, while Fuld was guiding Lehman to bankruptcy. Waxman said to Fuld, "My question is a simple one. Is this fair?" Fuld did not give a straight answer to the question, but only a meandering reply.

It is difficult to imagine a family member who is proud of the family’s reputation and integrity doing the same. We all know that the root cause of the current crisis is extreme greed to show quarter-to-quarter performance without looking at the implications for the people whose money banking institutions hold.

Families and businesses that are built to last have a combination of values and processes: trusteeship, otherwise called stewardship, coexist with strong systems and processes. All their decisions are guided by the core value of trusteeship but they do not lose sight of their commercial competitiveness.

The lesson for family businesses is clear: Remember the trusteeship role they are expected to play while taking business and family decisions. Family and business will naturally perpetuate. As noted by Prof John Ward of Kellogg School of Management (http://www.johnlward.com/), family businesses that last several generations are not driven by short term performance goals but long term growth and asset creation goals because they are clearly guided by the values of trusteeship in their members.

Trust is the fundamental value that builds any relationship. For that matter, all relationships are governed by trust. This is much more in organizations such as families where one does not have the freedom to choose its members. I tend to believe that trust keeps not only families but also communities together. For instance, the recent upsurge in violence in Orissa and Jammu & Kashmir raises questions about the extent of trust communities have for each other. Same is the case with the Ambani brothers.

The Zandu pharmaceuticals controversy and public dispute could have been avoided had there been adequate discussion on what could be done in case a partner wanted to exit. Central to this case is the sale of 24% of the ownership by the co-promoter family (the other promoter being the Vaidya Parikh family) to the Emami group that has already collected 3.75% of the shares of Zandu. The Parikh family is aware of the tilt in the ownership and changing power equation of such an act.

How could this have been avoided?

To start with, all well drafted share ownership agreements provide for situations such as this when one or more co-promoters from same or partner families want to exit for whatever reason.Often people do not envisage such a scenario to emerge at any time in future based on the existing sweet and smooth relationship. A good shareholders agreement would provide for exit option. Normally, other promoters or family members get the first right of refusal, at the then prevailing market price or valuation. Trouble erupts if there is no provision to handle such situations and relationships among promoters go for a spin.

Interestingly, people often do not recognize the need to have a clear shareholders agreement when their relationship is smooth. The next stage is when people feel concerned, but not willing to discuss in open with the stakeholders. In most cases, things remain at this stage for a long time, sometimes generations. However, if relationship goes through a bad patch, frustration to war is not too far, as prejudices and egos play spoil sport rapidly.

I normally ask families to develop/imagine best and worst scenarios of relationships when the business and family contexts undergo changes. Such scenario analysis done when the relationship is smooth can prevent many unpleasant situations in future. This could be part of improving family governance. Ideally, families should give the first right of refusal to other family members. The valuation is often slightly lower than the market price.

The urge to write a blog has been compelling, and grooming as my interactions and insights into the dynamics of managing family business deepens. Recent public reports on the Ambani brothers, the burning sensation created by Zandu have not dampened my enthusiasm to write this blog. On the other hand, some of the recent workshops that I have conducted for business families convince me that the urge to have peace and prosperity in the family is universal, and that people are looking for guidance to prevent situations going out of control.

Interestingly, many people do not know the ‘what’ and ‘how’ of it. A more alarming fact is that most people do not think it necessary to devote enough attention to the management of their families while spending all their time on building a competitive business.

Let me attempt to make a small contribution to facilitate some discussion that help business families to build lasting families and businesses.